Securitisation 2025

CHINA Law and Practice Contributed by: Borong Liu, Xiaoli Liu, Jingyi Lu and Zhijie Zhang, Zhong Lun Law Firm

Tax Law and the Regulations on the Implemen - tation of the Enterprise Income Tax Law, this tax is subject to withholding at source, and the withholding agent has a direct payment obliga - tion to the SPE. In the context of a cross-border securitisation, it is likely that a domestic asset servicer would be designated to withhold on behalf of the offshore SPE. However, as direct cross-border transfers of underlying assets cur - rently face foreign exchange control restrictions, the related tax issues have not been an issue in practice. Whether investment income obtained by for - eign investors from investing in ABS in China is subject to withholding tax remains somewhat ambiguous. According to the Ministry of Finance and State Taxation Administration Announce - ment [2021] No 34, from 7 November 2021 to 31 December 2025, interest income earned by overseas institutions from the domestic bond market is temporarily exempt from both enter - prise income tax and VAT. Although ABS are technically distinct from traditional bonds, they are considered member of the broader bond market, and the State Taxation Administration has not explicitly clarified whether ABS are eli - gible for this tax exemption policy applicable to bonds. In practice, tax authorities have not actively required domestic SPV managers or foreign ABS investors to withhold tax. However, prudent managers may choose to reserve funds for potential future tax liabilities. 7.4 Other Taxes If the underlying assets in a securitisation trans - action include real estate or equity interests, the transaction might also be subject to taxes related to real estate ownership and transac - tions, such as property tax, land value-added tax and title deed tax, or enterprise income tax. To alleviate the tax burden on the originator or

their affiliates, direct transfers of real estate are generally avoided in favour of transfers of equity rights in the company that holds the real estate. 7.5 Obtaining Legal Opinions If necessary, transaction parties may ask accred - ited tax advisers for professional opinions con - cerning specific tax issues. Lawyers advising on a transaction do not usually provide opinions on specific tax issues. 8. Accounting Rules and Issues 8.1 Legal Issues With Securitisation Accounting Rules The accountant’s determination regarding the consolidation of an SPV and a true sale is, to some extent, based on the economic essence of the transaction reflected in the terms of the transaction agreements. According to the Accounting Standards for Business Enterprises No 33 (ASBE No 33), published by the Ministry of Finance, the scope of financial statements con - solidation shall be determined based on control. When determining control, the accountant may consider three factors: power, variable returns, and the relationship between power and returns. For the assessment of the first factor, power, the originator’s power over the SPV as reflected in the transfer agreement and the servicing agree - ment is determinative. According to ASBE No 33, factors to be taken into consideration when determining whether the originator can de-rec - ognise certain financial assets include whether or not the originator has transferred almost all the risks and rewards relating to the ownership of the financial assets to the transferee, including whether the originator has transferred the rights to collect the cash flow and, if not, whether it has undertaken to pass on the cash flow of the

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